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Indiana's incredible shrinking workforce: What is the cause?

Jeff Swiatek, jeff.swiatek@indystar.com
1:45 p.m. EST March 3, 2014

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Jeff Sampson, a 35-year-old Butler astrophysicist student, enrolled in college at age 30 after spending 12 years in the Army after high school. Sampson, who grew up in Beech Grove, who has about two more years to go to get his degree, is among the rising number of people under age 65 who have dropped out or don’t take part in the active workforce for varying reasons.
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Sara Swinehart chucked her job as an autism therapist in Lafayette last summer to go on a cross-country bicycling adventure. The 27-year-old woman has yet to return to the workforce, living at her parent's home in Valparaiso while she weighs her job options.

Jeff Sampson's out of the workforce, too. At 35, the former Army soldier is studying astrophysics at Butler University, paying for it with the GI bill and grants.

The two belong to a growing and confounding economic demographic: working-age Americans who aren't working or even actively looking for work. "Not in the labor force," is the Census Bureau's term for them.

In Indiana, 38 percent of the labor force isn't laboring, at least in the formal sense. Among Midwest states, only Michigan has a larger percentage of out-of-the-work-force residents.

Work force participation

Indiana's overall participation rate in the labor force is expected to continue to decline in the coming decades.

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Census Bureau and Indiana Business Research Center

Stephen J. Beard / The Star

*Projected

The number is big in Indiana — around 2 million, more than the population of the Indianapolis metro area — and it's been growing. From the start of the latest recession in December 2007 until last August, Indiana suffered the largest drop in its workforce participation rate — as economists call it — of any Midwestern state. The rate of working Hoosiers fell from 66.7 to 62.3 percent.

The state's workforce participation rate hasn't been this low since the late 1970s, when society still had a large number of traditional stay-at-home mothers.

Economists and others who track labor trends don't quite know what's behind falling workforce participation, which is a national phenomenon as well.

"This is a major topic of conversation among economic forecasters," said Michael Hicks, director of Ball State University's Bureau of Business Research.

Most everyone agrees that the graying of America's baby boom generation has exacerbated the problem as larger numbers of boomers near age 65 and opt to retire early. But the erosion of the workforce participation rate since the recession ended in 2009 has exceeded most estimates that took into account the aging boomers.

That's left economists and others to blame the dropout rate on a host of other factors as well: the weak economy, surging attendance in college and adult education, a larger gray market of people working in the shadows, and sweetened federal disability and welfare programs that incentivize recipients not to work.

Hicks can see validity in all those explanations — even a growing legal and illegal gray market, which many economists think makes up as much as 10 percent of economic activity in normal times.

"I wouldn't be surprised if it's gone from 10 to 15 percent of the economy in Indiana," he said, as more people who can't find good-paying jobs resort to working informally for cash, largely untaxed and off the books.

As more people exit the work force, the effect is to reduce the unemployment rate, making it look like the economy is doing better. That's because the unemployment rate relegates people who've stopped actively looking for work to the special category of "out of the labor force."

The workforce participation rate is determined through federal labor market surveys that regularly sample households in every state and ask adults about their employment status and whether they are looking for work or not.

So large has that category now become that, for the first time, it's now being tracked by the nonpartisan six-member state technical committee that's charged with forecasting sales tax revenue for the state.

Replacing the jobless rate with the workforce participation rate in its forecast has given the committee "a better tracking of performance" for consumer spending and future sales tax receipts, said John Mikesell, an Indiana University professor and public finance expert who serves on the committee.

"It's a more meaningful barometer," he said, since people who've dropped out of the active labor market tend to spend less on consumer purchases, thus generating less sales tax.

Before it began tracking the workforce participation rate late last year, Mikesell said, the committee was coming up with overly rosy revenue forecasts for the legislature and governor by overlooking the sales tax-dampening impact of workforce dropouts.

Whether the workforce participation rate will grow again might depend on the economy reviving or not.

There's nothing like rising wages to draw people young and old into the workforce, said Maryann Keating, a fellow at Indiana Policy Review who's studied the labor force. "If the wage offer is higher than (expectations), people will work," she said.

IU's Business Research Center sees the workforce participation rate in Indiana continuing to be influenced by the inexorable trend of the aging baby boom generation. An IU study predicts the rate will continue to drop long-term until 2040, when it will bottom out at 58.6 percent.

For younger workers like Swinehart and Sampson, getting back into the labor force is a matter of when.

"I feel kind of lucky to have this time out of the workforce," said Swinehart, who spent months biking around the upper Midwest and in California and Arizona and living off her savings. She's thinking now of working for herself, or maybe taking a job as a bike messenger in Chicago.

Sampson's faced with an actual deadline. His veteran's benefits run out at the end of this semester, several semesters short of a Butler degree.

"I'm probably going to switch to being a part-time student," he said, "and I'm probably going to have to start working."

• Aging of the baby boom generation means more close-to-retirement workers opt to quit working early and rely on savings and pensions for income. "I just had a client who retired at the end of January and is 56. Financially, he's ready (to retire early), he's got his full pension and was a good saver," said Ed Snyder, a financial consultant and co-founder of Oaktree Financial Advisers in Carmel.

• More teens, young adults and even older workers have delayed entering the work force or exited it to attend college or retraining programs. They realize "to get ahead you're going to need education," said Matt Kinghorn, a demographer at the Indiana University Business Research Center. "And not only are more kids going to school, but they're going to school year-round. So, fewer people are moving in and out of the labor force."

• A gray market has allowed more people to work off the books for cash and not be counted in the formal work force.

• People have quit their jobs to live off federal disability and welfare programs that have seen record outlays in recent years. Recipients of federal disability benefits hit a record 10,978,000 last year, a number that exceeds the population of all but seven states. "There's widespread belief that's keeping people from working," said Michael Hicks, director of Ball State University's Bureau of Business Research. "But I don't think it's a game-changer for the economy."

• More people who've lost their jobs have opted to stay out of the workforce to care for elderly parents or children, often relying on a spouse to earn income to pay the household expenses.

• In a weak economy, a larger percentage of ex-offenders can't find jobs upon release from prison. "It's a very, very big problem. A lot of employers have blanket policies that say 'I don't hire anyone with a felony,' " said Rhiannon Edwards, executive director of Public Advocates in Community Re-Entry, an Indianapolis nonprofit that last year helped 3,000 ex-offenders with job training, education and other programs.